The start- up party comes to an end
Facing tougher funding conditions, companies find they have to actually make money to survive
Venture capital investors and domestic media reports have been warning recently that the “severe winter” for Chinese entrepreneurship has arrived.
The “winter” began in the second half of 2015 – following the domestic stock market’s crash over the summer. The collapse in public valuations bled into the primary market, making it difficult for start- ups to raise money from venture capitalists and other private investors.
Although the situation has not improved this year, some high- tech companies have announced surprisingly high funding rounds, which have attracted a lot of public attention.
Domestic ride- hailing giant Didi Chuxing announced in mid- June that it raised $ 4.5 billion in equity financing from powerful investors including Apple Inc.
Shenzhen- based DJI Technology, the world’s largest maker of consumer drones, also told the Global Times earlier in July that the company received a new round of financing last year, which pushed the company’s valuation to about $ 10 billion.
Nonetheless, there have been a lot more failures than successes, and the failures are growing more common.
Since the second half of last year, it has grown more and more difficult for start- ups in China to get funding. Many start- ups went bankrupt this year, and those lucky enough to survive have had to endure large- scale personnel turnover and layoffs. Investors see the lack of profitability of start- ups, the bubble in valuations, the slump in the capital markets and their own tight capital flows as the main reasons for the difficulties. Although they are not optimistic about the situation, many investors still view the difficulties as an opportunity for China’s start- ups to return to the basics of business.
Funding dries up
The vast majority of China’s start- ups have come to depend on investor funding to keep their businesses afloat. So, a look at the country’s funding environment can illustrate the current plight of start- ups.
The fact is that it has grown more and more difficult for start- ups to get funding over the last year or so. According to a recent report by global venture capital fund IDG, more than 77 percent of surveyed start- ups said it was difficult to get funding in 2016.
It has been especially hard times for China’s Internet industry, which accounts for nearly 20 percent of the total funding in the market. There have been fewer deals this year, and those deals have been for smaller amounts.
In the second quarter of 2016, the number of venture capital funding deals in China’s Internet industry shrunk 3.24 percent from the previous quarter to 328, according to data from Beijing- based financial data provider China Venture. Meanwhile, the total amount of funding plummeted 55.68 percent to $ 3.78 billion.
Because it has gotten so hard for some start- ups to get funding, many haven’t been able to survive the winter, including some former “stars.”
Metao. com, a large cross- border shopping platform, recently announced it was shutting down. The company, established in March 2014, had a good run for two years. It received $ 5 million in its series A funding round in July 2014 and $ 30 million in its series B round in November 2014. But it ended up failing after initiating a price war against other online retailing giants.
Bopai. com, an O2O platform that provided car washing and auto maintenance services, announced its bankruptcy in April 2016. The company raised $ 18 million in its series B funding round from e- commerce bigwig JD. com. The investment valued the company at $ 600 million. Yet the company still failed due to its extremely aggressive subsidies, which stripped its profit margin to the bone.
With the numerous difficulties, startups have also had a hard time holding onto workers. The overall separation rates for the Internet finance, social networking, O2O, e- commerce and culture and entertainment industries hit all- time highs of 4.69 percent, 5.20 percent, 8.3 percent, 4.32 percent and 4.21 percent, respectively, according to data released in July by bosszhipin, a popular App for recruitment.
Demand for talent also fell. Many Internet companies, the most active industry in terms of entrepreneurship, innovation and talent recruitment, began to significantly reduce their staffs in the fourth quarter of 2015, according to bosszhipin.
“The winter has gone on much longer than we thought it would,” Dai Kebi, the CEO of liepin. com, a major talent recruitment website, was quoted in July by iheima. com, a Beijing- based entrepreneurship service platform.
“There have been no signs that China’s capital market will improve significantly in the next six to 12 months,” he said.
It’s quite a departure from 2015, when 79 “unicorns” emerged from China’s start- ups, each valued at more than $ 1 billion.
Cash flow is king
“Now it is generally the smaller, younger unicorns that are facing difficulties, since most of these companies are unprofitable,” said an investor surnamed Wang from a Hong Kong- based investment company,
Wang has been in the investment industry for more than seven years. “Investors now are quite cautious about how fast these companies are burning through cash,” she told the Global Times on Friday.
The well- known investor Zhang Ying, a partner at Matrix Partners China, said that these companies are dying because they don’t know how to handle a crisis or manage their cash flow, Beijing- based industry Web portal pedaily. cn reported on June 29.
In addition, venture capitalists and private equity investors have had their own problems securing funds for their own investments, so there is less money available for making investments in start- ups.
In the second quarter of this year, China’s VC funds raised only $ 400 million, two- thirds of what they raised during the same period in 2015, according to data from the UK- based consulting firm Preqin. It was the smallest amount in nearly three years.
With all of the challenges that China’s start- ups face, investors cautioned that valuations may have to be reappraised.
“Some valuations are unreasonably high,” Wang said, adding that start- ups usually exaggerate their previous financing amounts to get higher valuations.
“Some change their financing amounts to dollars from yuan, and some even exaggerate the amounts by 10 or 100 times,” Wang said.
More and more investors are pushing start- ups to return to the basics of business rather than blindly expand market share by “burning cash” or other price war measures in pursuit of more financing.
“Sound cash flow is more important than external funding,” You Limin, director of development and strategy at Guangdong Galanz Enterprises Group, told the Global Times on Thursday.
“Companies will have more autonomy if they rely more their own cash flow rather than on investors,” You said.